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How to Choose Between 0% Financing and Cash Back

In recent years, manufacturers have been offering a lot of loan incentives such as 0% financing.

Sometimes you have the choice between zero/low APR financing or a cash back rebate. So how do you decide between the two?

First of all, in order to qualify for a low APR offer, you generally have to have great credit. If you don't, then it's an easy choice: take the cash rebate!

If you're one of the lucky ones with solid credit, you can arrange your own financing for between 3% and 6% in today's market. What you need to do is figure out the difference in interest rates between the low APR offer and what you can arrange on your own.

If you can arrange financing at 4% interest on your own, then a low APR offer doesn't really look that great, especially if it's not 0% financing. To give you a very general idea of what a cash rebate is worth in relation to comparable interest rates, I've done the calculations on a typical new car costing $25,000 (with state taxes of 5%).

As you can see, a $1,000 cash rebate is equivalent to a 2% difference in interest rates over a 48 month loan and 1.5% over a 60 month loan.

Cash Rebate 48 mo 60 mo
$1,000 2% 1.5%
$1,500 3% 2.2%
$2,000 4% 3.2%
$2,500 5% 4%
$3,000 6% 5%

So let's do an example. If you have the choice between 0% financing over 48 months or $1,000 cash back, which one should you take? Again it depends on what kind of financing you can arrange on your own. Let's assume you can get a car loan at 4% over 48 months.

Since the difference between the 0% financing and what you can arrange equals 4%, it makes sense to take the financing deal because a $1,000 rebate is only equal to a difference of 2% interest.

I recommend that you first check your credit score to see what kind of rates you could qualify for. Use this calculator to determine exactly which offer makes better sense for your particular situation.

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About The Author

Gregg Fidan Gregg Fidan is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.
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